The Tax Implications of Investing in Non-Registered Investment Accounts in the U.S.

If you are a Canadian citizen who is planning to live in the U.S., there are several types of investments you can make other than those made towards your retirement savings. These investments are usually made towards non-registered investment accounts and the tax implication for all of them is different in both the countries. Here is an explanation of how taxes will be applicable when you invest in different types of accounts.

Mutual Funds
If you have invested in U.S. based mutual funds, all distributions from such accounts would be treated as foreign dividends. However, in the U.S., they would retain their nature when reported on the U.S. tax return and will receive the proper tax exemptions when necessary. However, the gains from such accounts will be treated as foreign income in Canada with all of the capital gain been included in it. Same is the case with U.S. dividends as they too would be taxed in Canada and you won’t be able to get dividend tax credit.

Tax-Exempt Interest
If you receive federal income tax interest in the U.S. on bonds issued by city and state governments, you won’t be required to pay any taxes on such income in the U.S. However, these interest gains would be treated as foreign income in Canada and are taxable.

U.S. Partnerships
Another common form of investment that you can take up in the U.S is partnership. In this scenario, you can hold real estate or other assets with other individuals in joint ownership. In the U.S., the partnership itself doesn’t have any tax implications, but partners would be required to pay taxes on the income, expenses, gains and losses resulting from their partnership as part of their income tax return. The same income would be taxable in Canada even after it has been converted into Canadian dollars.

Limited Liability Corporations
These type of investments are similar to partnerships in respect that they are not taxed as corporations but on individual basis instead. In the U.S., individuals owning LLCs are required to pay taxes on the gains and incomes from these corporations as part of their own income tax return. However, they are not treated the same in Canada, where they are taxed as corporations instead. Rather than being taxed on their share in the LLC income, members would be taxed on the distribution received. This difference in reporting can create a difference in the income reported in a year and can often lead to double taxation.

Foreign Income Verification Statement
Canadian residents who own properties in the U.S. which cost more the C$100,000 are required to file a Foreign Income Verification Statement (T1135). Filed with your Canadian tax return, it should explain what type of property is owned, what the range of cost of the property is, what kind of income is reported on these properties, and where they are located.
All these tax matters between the two countries can be extremely complicated to understand. Therefore, it is always best to consult a tax professional who can handle these matters on your behalf.

Eric La CaraManaging Partner and Tax Practice manager for Capital Tax in Vancouver and Tokyo. Eric is a U.S. and Japan Personal & Corporate tax specialist with more than 15 years of experience in the area of cross-border structuring and taxation. Eric is charged with developing Capital Tax overall operations and strategic direction using the business and technical skills he has acquired during his professional career in Asia.